Petroleum and Investment Grade Rating

Petrolera Zuata, Petrozuata C. A. expression study La Apertura (The Opening) Target Orinoco Belt serious/extra heavy oil accumulation (biggest know in the world) Key Strategy Opening Venezuelan oil sector to foreign oil companies How clear sharing organizations, ope valuation service agreements, strategic joint-venture associations self-possession PDVSA or subsidiaries contribute10 years), fixed interest rates, fewer to a greater extent flexible covenants, larger amounts. Cons fund must be raised in a lump sum.Excess bullion create a drag on lolly (negative carry) swayer 144A market (private placement market) Pros Like populace bonds + speed, underwritten within six months Cons unaccompanied qualified investors bottom invest in them Conditions inevitable hot markets and investment funds grade rating What kind of debt to choose? The sponsors should wont 144A (private bonds) to fund the deal because of the important advantages and the signifi earth-closett disadvan tages which push aside arise by using the opposite debt kinds. Rule 144A has big advantage of time Markets seem to be going in the right direction (Hot markets) What else is needed? (on the next slide Investment grade) Investment say Rating Agencies look at 3 principal(prenominal) itemors sponsors creditworthiness, endures economics and Venezuelas self-directed risk. Problem Venezuelas rating S&P B Moodys Ba2 Petrozuata is strictly committed with countrys risks because it is controlled by PDVSA which is Venezuelas evince oil company and operates in Venezuela If Venezuela defaults on its debt Petrozuata entrust default too unless Conoco Inc. is a subsidiary of DuPont which operates widely distributed and has investment grade rating Investing in Petrozuata is indirectly spend in DuPont If you invest in Petrozuata your real investment is also in Venezuela and DuPont Petrozuata project has a very severe structure and care projections Same comparables with other oi l companies operating(a) in other countries and having investment rate mark reticular activating system Laffan example of oil company having high rating than the country in which it operates(Qatar) In order to develop investment grading it is very important to control DuPont in the deal If rating agencies consider the fact that Petrozuata will repay its debt although Maraven defaults on its part of debt because DuPont wants to mantain its considerably reputation it might obtain an investment grading If Venezuela is strictly linked to Petrozuata and has a B consequently Petrozuata should have at least a B rating plus a considerable gift because the risk is diversified into DuPont Projects coarse case DSCR would probably have to exceed 1. 0X Break-even storey low enough so the project can cover all operating and financing be if oil prices fall substantially Is it a good deal? We would invest in project bonds as they will likely yield a higher return compared to the 21% cost of blondness. Factors that need to be considered Hierarchy of payments is good (referred to Cash Waterfall) repose Sheet and Income statement suggest PDVSA and DuPont are divinatory to be solid companies Oil prices are non that volatile fluctuating but arresting some a price between $20 and $25 per barrel (suggested nominal break-even price in 2008 $8. 3 per barrel) Lower operating costs with respect to competitors (cash operating cost around $3. 19 against perseverance median(a) at $8. 55) More than enough heavy crude oil reserves to sustain the planned return according DeGolyer & MacNoughton (U. S. based oil consulting firm) Projects design in accordance with good industry practice complying with Venezuelan and International purlieual laws as stated by Stone & Webster Overseas Consultants, a U. S. ngineering and consulting firm What should Conoco take into account? True task is not very favorable barter environment Theoretically, if all contracts are re spected and hierarchy of payments holds, the only entities bearing risks are PDVSA and DuPont with their capital investment Banks and whoever invests in project bonds according to the hierarchy of payments should be a safe investor Uncertainty in governments future actions could be very harmful.Remember that in January 1976 the Venezuelan government nationalized the domestic oil industry and the pay package was only 20% of market treasure (according to foreign oil companies). Lending to Petrozuata is indirectly investing in Venezuelas business environment and doing business with the government as PDVSA is 100% government owned, which has a non-investment grading by rating agencies What should Conoco do? evolve carefully in consideration what has been mentioned Make an in depth analysis on Venezuelas macroeconomic issues Try to revise the Off take agreement to be sure of having the right to buy the 104,000 BPCD at the pre-fixed price If benefits exceed these further costs whe nce consider equity investment Otherwise the trump out move would be to take some other entity in the deal to diversify risks even much Personally, we would be very cautious with investing equity capital as Conoco.